European Aeronautic Defence and Space Company EADS, France
Department of Strategic Coordination; Strategy and Planning

"TRANSATLANTIC COMPETITION OR COOPERATION?
THE FUTURE OF THE EU AND US DEFENCE MARKETS - AN EADS VIEW"

Lecture in the Great Debate seminar " European Armaments Industries, ESDP,
and Transatlantic Cooperation",
PARIS, 29-30 March 2001

We Need Competition AND Cooperation

Trying to explain why a company like EADS wants cooperation and competition
at the same time, we need to address first some elements of the background envirnment.

It is now well known that most western countries have moved from a static defence
posture backed by nuclear deterrence to a policy of dynamic crisis management
within the Alliance's framework. This translates into key business drivers for
defence industry like: less defence procurement, more operations, and lower
priority for defence budgets in front of new socal constraints, such as health
and welfare.

Another important element in the environment is the increased awareness that
recent conflicts have evidenced key capability gaps. For instance, DCI - the
NATO Defence Capabilities Initiative - has shown gaps within the Alliance, such
as the capability to engage time sensitive targets, all weather, low cost smart
munitions required for long lasting operations, theatre ballistic missile defence,
to name just a few. DCI has also shown gaps between the US and their allies
in key areas such as ISR (Intelligence, Surveillance and Reconnaissance), real
time targeting, and strategic lift.

Finally, the political environment also is showing important evolutions, although
signals are still somewhat conflicting across the Atlantic when it comes to
defence maters. For instance, from a European perspective, the US are already
perceived as enjoying a dominant position. However, the US administration is
clearly willing to increase defence spending and to leapfrog technologies for
aerospace and defence. US policy makers seem to be divided about the question
of whether or not the US should support a European Security and Defence Policy.
In contrast, the European Union is stating its willingness to establish such
a European Security and Defence Policy, when, at the same time, most European
defence budgets are still below their stated objective target of 2% of GDP (1),
and are often decreasing. More of a concern is also the constant decline in
European R&D funding. Also, European policy makers seem to be divided about
the question of the link between European military assets and NATO.

Identifying Future Defence Market Trends

In this context, identifying future defence market trends is difficult and
can be seen from two different perspectives.

On the negative side, there is the increase in the transatlantic technology
gap caused by the difference by a factor of about 3 or more between the US and
Europe when it comes to the overall level of funding R&D and technologies. This
is seen by some as a reason to advocate a 'Fortress Europe' (trying to protect
supposedly weak European assets) and a 'Fortress America' (trying to avoid 'leaking'
US technology to Europe).

On the positive side, it is a fact that we have seen some acceptance of new
transatlantic business arrangements (e.g. BAE Systems acquiring Sanders, the
Raytheon Thales joint venture). In Europe, within the framework of the LOI -
Letter of Intent - between six nations (2), a new framework is being defined
to deal with such difficult issues as security of supply and export control
of armaments, a body like OCCAR for instance is advocating a relaxation of the
famous 'juste retour' principle which was impeding most European cooperation
programmes by imposing international work-share arrangements in proportion of
national funding.

Finally, defence funding in Europe should also eventually incease as a result
of the current obslescence of a large fraction of the military inventory, of
new DCI and interoperability requirements, and the planned installation of a
European Rapid Reaction Force. Overall, new programme opportunities should appear
in Europe and in the transatlantic 'two way street'.

Toward 'Co-opetition'?

For those reasons, co-opetition - meaning a combination of co-operation and
competition between the same aerospace and defence companies - will be the new
name of the game:
We, as an industry, all want to be a global player, even if according to different
business models (e.g. Boeing and EADS on one side, with a mix of commercial
and military activities, Lockheed Martin and BAE Systems on the other side,
with a clear focus on military activities). Since our customers clearly cannot
accept monopolies, those global players will compete and are ready to do so.

In contrast, it is also clear for us that a 'Fortress Europe' would not be
strategically sustainable in front of a mighty 'Fortress America'. In addition,
we might anticipate that the US will need an extended market to sustain their
competitive procurement approach, and Europe is their second market by size
and solvability. Also, European industries need to mitigate the risk of the
technology gap and are seeking to share new NATO programme opportunities with
their US counterparts (e.g. AGS - Air Ground Surveillance, TBMD - Theatre Ballistic
Missile Defence). Therefore those same global players will co-operate.

EADS has reached its target of being a globally competitive player in commercial
aeronautics and space. We are willing to achieve an equivalent position in defence,
and therefore willing to enter in strategic cooperation with US companies.

What Still Needs to Be Done

As a conclusion, there is a willingness on both industrial sides, but our customers'
conditions are not yet met: we are still lacking a transatlantic defence policy
framework, with more integration and more transparency on the customer side,
from security policy to defence policy and eventually armament policy. We still
need more visibility on business development opportunities, such as acceptance
of foreign ownership and the corresponding regulatory framework. And, eventually,
we will need more evidence that it makes pure business sense, that is: more
European and transatlantic programmes, with the adequately shared technological
content, more understanding on the joint access to export markets, within the
limits of agreed counter-proliferation policies, more return on investment when
considering the new procurement trends asking for more funding up-front from
industry.

As a conclusion, from the EADS perspective, there should be more reasons for
NATO nations to co-operate than to compete, including in the defence field of
activities, and EADS is ready to be fully involved as a global competitor as
well as a desirable and reliable cooperation partner. European aerospace and
defence industry has been going as far as possible in taking the initiative
of restructuring. The next significant transatlantic step will require an equivalent
willingness and support from the nations as customers and regulators of defence
industry.

NOTES:

(1) Current orders of magnitude for the ratio between
defence expenditures and GDP are 3% in the US, 2.4% in the UK, 1.85% in France
and 1.2% in Germany.